In some ways buying a franchise is more complicated than starting your own business or buying another existing business. The franchisee must enter into a complex, permanent relationship with the franchisor. This business model has a lot of advantages. They get access to proven methods and a brand with a solid reputation. They also can count on the support of the franchisor; who has as a vested interest in seeing them succeed.
However, often the franchise agreement strongly favors the franchisor. When the franchisor fails to live up to their legal obligations or when they act in a way that is unfair or even fraudulent, the franchisee may be forced to file a lawsuit to protect their investment and compel the franchisor to honor their obligations.
There are a variety of reasons a franchisee may decide to file a lawsuit. Here are some of the more common reasons.
Fraud and Misrepresentation in the Selling of a Franchise
Franchisors have to be honest when soliciting buyers. Any fraud or misrepresentation on the part of the franchisor could impact the decision on the part of the potential franchisee. If fraud or misrepresentation is later discovered, the franchisee can often sue to recover damages and to try and get out of the deal.
Because most of the issues in franchise law relate back to the franchise agreement, any fraud or misrepresentation could go to the core of the decision to purchase the franchise. The parties may not have ever had a true legal agreement if one side was misleading the other.
Failure to Register – In many instances before a franchisor can offer franchises for sale in Florida, they must properly register the business opportunity in accordance with the Florida Sale of Business Opportunities Act. If a franchisee finds that the franchisor failed to register properly, they may be able to recover their investment through litigation. Because this particular area of franchise law is complex, an attorney that specializes in franchise litigation may find several different causes of action in addition to the failure to register.
Failure to Make Disclosures – Buying a franchise is a major investment. The law offers buyers several protections during the purchasing process. One of the key protections is the requirement that the franchisor make certain disclosures. The failure to make these disclosures may end up the subject of litigation. In the most drastic cases, a failure to make disclosures will result in the purchase of the franchise being rescinded and the court ordering the franchisor to refund any payments.
Breach of Franchise Agreement
The most common reason for franchisees to file a lawsuit against the franchisor is for a breach of the franchise agreement. Even though the franchise agreement is almost always written to favor the interests of the franchisor, sometimes franchisors still fail to live up to their legal commitments.
Litigation is often the only way for a franchisee to seek damages or to prevent further harm to their investment. Often breaches of the franchise agreement by the franchisor relate to changes in the way the the business is operated.
Improper or Unfair Changes in Policy – Before making any changes in policies or practices, the franchisor must make sure they are fulfilling their duties. Disputes arise when policy changes hurt one or more franchisees. This may give rise to a cause of action for a breach of the franchise agreement. Often the initial goal of litigation over policy changes is to seek an injunction to prevent the execution of the new policy until all of the objections have been dealt with.
Breach of Duty of Good Faith and Fair Dealing – A franchisor can be sued if they act with an improper motive. For instance, if they seek to help a friend or family member at the expense of another franchisee. If a franchisor breaches its duty of good faith and fair dealing, it can be sued, even if its actions are not otherwise a violation of the franchise agreement.
One of the most frustrating things for a franchisee is to see the franchisor open, or allow other franchisees to open, new franchises in close geographic proximity to them. Typically, the franchise agreement provides for territorial exclusivity. When the franchisor opens up another franchise in the exclusive area it is called territory encroachment.
This action could diminish the value of the franchise and compromise its revenues. Franchise litigation attorneys often file claims to stop territory encroachment or to seek damages resulting from the encroachment. These cases may also relate to the duty of good faith and fair dealing when there is not a specific provision of the franchise agreement that deals with exclusive areas of operation.
Even though franchisors are powerful, they must still act reasonably. Because of the nature of the franchise business model, a termination of a franchise can have severe financial consequences. If the franchisor did not act in accordance with the franchise agreement, the franchisee can sue to try and force a reinstatement, seek damages for the wrongful termination, or both.
Improper Refusal to Renew – The extension of a franchise is usually for a limited period of time. Sometimes, instead of terminating a franchise the franchisor will, instead, decline to renew. The franchise agreement will spell out under what circumstances the franchisor can refuse to renew. If the franchisor has acted improperly, the franchisee will need to engage a lawyer to get the franchisor to reverse course or get a court order requiring the franchisor to honor the terms of